Presentation on theme: "The WS-PS model of the labour market"— Presentation transcript:
1The WS-PS model of the labour market The Macro approach to the Labour market
2The WS-PS model of the Labour market IS-LM model examines 2 markets : the goods market and the money marketThis allows us to determine 2 variables:The equilibrium OutputThe equilibrium rate of interestBut we’ve assumed that prices stay fixed!!This might be OK in the short runBut is otherwise unrealistic
3The WS-PS model of the Labour market Problem: We want to determine prices (inflation) as well as output and interest ratesHow do we do that?We have to add another market (i.e. Another equilibrium equation)It turns out that the required market is the labour marketThis is because it is the market for the main factor of production
4The WS-PS model of the Labour market DefinitionsThe Wage-Setting equationThe Price-Setting equationThe structural rate of unemployment
5Definitions Employed population (ILO definition) People that are at least 15 years of age;People that have worked (even for a single hour) during the reference period even if self employed, or employed in a family business;People that are employed but on temporary leave of absence (illness, maternity leave, training, etc.);Members of the armed forces, apprentices, paid interns, are part of the active population.
6DefinitionsEconomically Active population in France (ILO definition, 2004)
7Definitions Unemployed (ILO definition) According to the 1982 definition, a person is unemployed if he/she is a member of the working age population (15 years or more) and fulfils the following conditions:Is not employed : has not worked a single hour during the reference period;Is available for work within 15 days ;Is actively searching for employment.
8Definitions Total French Population (60 Million) Working Age Population (39)Economically Inactive Population(21)Labour force (Economicallyactive population) (27)(12)Employed population(25)Unemployed (2)
9Definitions Total French Population (60 Million) Working Age Population (39)Economically Inactive Population(21)Labour force (Economicallyactive population) (27)(12)Employed population(25)Unemployed (2)
10Definitions Total French Population (60 Million) Working Age Population (39)Economically Inactive Population(21)Labour force (Economicallyactive population) (27)(12)Employed population(25)Unemployed (2)
12Definitions The unemployment rate in France First Oil Shock Second Oil ShockRecessionEconomic recoveryThe unemployment rate in France
13The WS-PS model of the Labour market DefinitionsThe Wage-Setting equationThe Price-Setting equationThe structural rate of unemployment
14The WS Equation Wages can be determined in several ways Individual negotiationsBranch agreements (Trade union negotiations)National legislationsTwo main factors play a role:The reservation wageThe wage at which one is indifferent between working or remaining unemployedMarket conditionsThese determine the bargaining power of the employee.
15The WS EquationThe bargaining power (BP) of a worker is a function of two factors:The ease with which the firm can replace himHigher likelyhood of replacement ⇒ ↓ BPThis is linked to the skills of the worker and/or the job characteristicsThe ease with which he can find another jobHigher likelyhood of finding job ⇒ ↑ BPThis is linked to the level of unemployment
16The WS Equation The nominal wage W is a function : Of the expected level of prices PeNegotiations occur at discrete intervals (every X years)They are based on the expected purchasing power for the duration of the intervalOf the rate of unemployment uHigh unemployment reduces the BP of workersMarket factors zInstitutional factors (unemployment benefits)Structural changes in the economy (skill biased TC)
17Real wages are a negative function of the rate of unemployment The WS EquationReal wages are a negative function of the rate of unemploymentReal WageWSUnemployment rate u
18Real wages are a positive function of market conditions The WS EquationReal wages are a positive function of market conditionsReal WageWS’(z’>z)WS(z)Unemployment rate u
19The WS-PS model of the Labour market DefinitionsThe Wage-Setting equationThe Price-Setting equationThe structural rate of unemployment
20The PS EquationThe actual level of prices is determined by the wage rateW represents the marginal cost of productionIn the SR, output is a function of labour: Y=NAssumption : constant returns to scale(1 + μ) : markup on the goods marketsμ=0 : perfectly competitive marketμ>0 : Imperfectly competitive marketIn choosing μ, the firms influence the level of the real wage
21The PS EquationRearranging the PS equation allows us to express the real wage as a function of the markup rate...This way we can draw the PS equation in the same space as the WS equation
22The PS Equation Real Wage PS Unemployment rate u The real wage induced by the PS equation is independent of the rate of unemploymentPSUnemployment rate u
23The WS-PS model of the Labour market DefinitionsThe Wage-Setting equationThe Price-Setting equationThe structural rate of unemployment
24The structural rate of unemployment The structural rate of unemployment un equalises WS and PSThe structural rate of unemployment:Is independent of short-term fluctuationsAs a result it is often called “natural” but this is incorrectun is a function of the structural parameters on the labour market zUnemployment benefits, production technology, etc.un is a function of the structural parameters on the goods market μBarriers to entry, level of competition, etc.
25The structural rate of unemployment The labour market equilibrium implies that the wages determined through the bargaining process are consistent with the price setting behaviour of firmsReal WageAunWSPSUnemployment rate u
26The structural rate of unemployment WS’1. An increase in unemployment benefits shifts WS to the right (better labour market conditions)...Real WageA’u’n2. ...Which increases the structural rate of unemploymentAunPSWSUnemployment rate u
27The structural rate of unemployment PS’1. An increase in the level of competition reduces the markup...Real Wageu’nA’Which reduces the structural level of unemploymentAunPSWSUnemployment rate u